Investors Showing Scant Interest in Mid-Tier Office Properties

Although property investment – especially for trophy buildings – is coming back more strongly than industry analysts had anticipated, mid-tier properties are not yet enjoying a similar rebound.  According to Real Capital Analytics (RCA), properties valued at $20.6 billion were sold during the 2nd quarter of 2010, an 86 percent increase over last year.

According to Dan Fasulo, an RCA analyst, owners of mid-tier properties are having more difficulty finding buyers.  “Eventually the bidders who keep losing out on these competitions are going to readjust their expectations and will start to try other strategies, whether it’s investing in lower-quality property or going into a secondary market.  It’s inevitable.”

Declining vacancy rates also could create renewed interest in mid-tier properties, said Ryan Severino, an economist with Reis, which believes that national office vacancy rate will fall from its 17.7 percent peak this year.  “A lot depends on what happens to the office sector overall, but we are beginning to see the first glimmer of stabilization,” Severino said.  Still, financing for smaller transactions is difficult to obtain – a stark contrast with trophy property deals.

Some smaller community banks are willing to provide capital to owners of mid-tier properties.  In the 1st quarter of 2010, approximately 80 percent of mortgage originations refinanced existing projects, according to Randy Fuchs, a principal of Boxwood Means, a real estate analysis firm.  In contrast, refinancing comprised just 50 to 60 percent of loan originations in 2006 and 2007.